Therelationshipbetweendividendpolicy,nancialstructure, protabilityandrmvalueSAMYBENNACEUR* andMOHAMEDGOAIED{Department of Quantitative Finance, Universite Libre de Tunis, Tunisia and{DepartmentofQuantitativeEconomics,Universite deTunis-Menar,TunisiaThis paper investigates the valuecreationprocess inthe Tunisiastockexchangeusingasampleincludingmorethan90%ofthelistedcompanies. Inordertondout the determinants of the valuecreationof the selectedcompanies, it uses therandomprobitmodelestimationprocedurewith unbalancedpaneldata. The resultsindicatethattheprobabilityofcreatingfuturevaluesispositivelyandsignicantlycorrelated with protability factor. In addition, the results also suggest that the valuecreationisaectedbyindustrypatterns(listedbanksarethemorevaluecreatorintheTunisiastockexchange), bysize(theprobabilitytocreatevalueisstronger insmall rmsthaninbigones) andbynatureof property(theprobabilitytocreatevalueisstronger inprivate-ownedrmsthaninpublic-ownedones). Lastbut notleast, thetimetrendfactorispositiveandhighlysignicant. Thisndingsuggeststhat the progressive reforms of the Tunisianstockexchangehave attractednewinvestors, whohavecontributedbytheirpurchasetotheappreciationofthevalueoflistedshares.I. INTRODUCTIONThe Tunisian Stock Exchange has undergone severalreformssince1989 in ordertoenterthearenaoftheemer-gent markets. Thesereforms include: privatizationof thestock exchange, creation of a `Tunisian SEC and a clearinghouse;introductionofnewnancial instruments; abolitionof taxes onstockrevenues; introductionof anelectronicquotationsystem and reorganization of the stock exchangeintothree dierent markets. All these reforms havecon-tributed to increase the market capitalization from610milliondinarsin1991 to2632 millionin 1997 andthevol-umeoftransactionfrom91milliondinarsin1991to590millionin1997.Thesepositiveindicators mixedwithastudy done by Sachs (1998) inwhichTunisia is rankedsecondmost competitive Africannationhaveattractedforeign investors inTunisia. However, foreign investorshave deplored the absence of scientic studies dealingwithhowthe Tunisiannancial market works (asfar asweareconcernednostudyhasbeenpublishedinEnglish).Thestudysaimistollthisgapandthen, enableforeigninvestors tohaveaclearerinsight about themechanismsrulingtheTunisianstockexchange.Strategic analysis was born in the US in 1965 afterAnso(1989)andtheHarvardBusiness School popular-ized the concept of strategy. Since then, strategy hasevolved as an autonomous area of research separatedfrom nancial analysis (Myers, 1984; Barwise et al.,1989).However, DeBodinat(1978)wasthersttointro-duce alinkbetweenthe strategicpositionof acompanyanditsnancial performance. Stepbystep, emphasiswasput on the nancial dimension of the strategic models(BostonConsultingGroup),but thisapproach was heavilycriticizedbecause it fails tograspfullythe linkbetweenstrategyandnanceinacompany(Couret et al., 1991).Inorder torespondtosuchcriticism, newglobal modelsweresetuptointegratenanceandstrategy(Pe ne, 1983;Surbled, 1984; Degos et al., 1988) andresearchers haveAppliedFinancial Economics ISSN09603107print/ISSN14664305online # 2002Taylor&FrancisLtdhttp://www.tandf.co.uk/journalsDOI:10.1080/09603100110049457AppliedFinancial Economics,2002, 12,843849843* Corresponding author. E-mail:sbennaceur@eudoramail.comshedlightontheimpactofthenancialfunctionoverthestrategicdecisionprocess.Morerecently,creatingvalue forarmsshareholdersthewidely acceptedobjectivefortherm has beenincor-poratedintothestrategicmanagement literaturethroughwhat is termedvalue-basedplanning (Hax et al., 1984).This approach provides a conceptual and operationalframeworkforevaluatingcorporatestrategy. Atthesametime, academics have applied value creation issues tomergers and acquisitions (Rappaport, 1981), divestituredecisions (Alberts et al., 1984), business unit evaluation(Arzac, 1986), marketing strategy and company sales(Kerin et al., 1985), and asset growth (Higgins et al.,1983; Fruhan, 1984).Rappaport (1987) denedthe value drivers as growthrate, operating prot margin, income tax rate, workingcapitalinvestment, xedcapitalinvestment, costofcapitalandvalue growthduration. Cabyet al. (1996) andBenNaceuretal.(1998)havecombinedthemeasuresofvaluecreation with the value drivers in order to determineempirically the maindeterminants of the value creationprocess.Since then, the dependent variable, i.e. the value creationin the stock exchange, is measured by a dichotomousresponse, the econometric procedure uses probit modelsestimated on unbalanced panel data. The use of paneldatasets inthe studyof emergent nancial markets isamore accessibleissue asit allowsthe estimationof morerealistic behavioural models. Furthermore, the eciencygains fromusing the information contents in the panelstructure of the data may be substantial incomparisonwiththeuseof singlecross sectiondatacharacterizedbyasmallnumberofindependentunits.1Theobjectiveofthepresent paperistotestempiricallythe determinants of the future value creation of theTunisiancompanies listed inthe stock exchange duringtheperiod19901996. Totheauthors knowledge, this istherst empirical studyof theemergent nancial marketissue,whichemphasizethedeterminantsofthevalue crea-tioninthestockexchangeusingtherandomeect panelprobitmodel.2The remainder of the paper is organized as follows.SectionII presents abrief overviewof the methodologyadopted. SectionIII presents the statistical specicationsof the xed eects logit model and the random eect probitmodel. Section IV contains a description of the datasource. SectionVprovidesevidenceontheimportanceofcompetingexplanationsforthefuturevaluecreationpro-cess intheTunisianstockexchange. Concludingremarksfollow.II. METHODOLOGYValue-basedplanningmodels sharethe commonpremisethat managers seek tocreate shareholdervalue by ensuringthat the warranted marketvalue, MV, ofthe equitycapitalinvestedinthermbytheshareholders exceedthebookvalue, BV, of equity. Inother words, arms managerscreatevalueforshareholdersifMV> BV, destroysvalueif MV< BVandsustains valueif MV BV. Thedeter-minants of value creation anddestruction are thereforeessentialstoshapethestrategyofacompany.Therstauthorinthenancial literaturetoinvestigatethe valuedrivers was Fruhan(1979), whoexpressedtheratioMV=BVas:MVBV 1 ROE KeKe g 1 1 g1 Ke n 1 g1 Ke n1withROE ROA ROA KD 1 tisWhereROEdenotestheexpectedreturnperyearonbookequityinvestment; Kedenotes the cost of equity capital;gdenotes theexpectedannual rateofgrowthof earningsperyear; nisthenumber of yearsoverwhichthermisexpectedtomaintainits current ROE; ROAdenotes thereturn onassets; KDdenotes the cost of debt; tisis thecorporatetaxrate.Equation (1) can be viewed as a generic representation ofa value-based model and will be designated the nitegrowthmodel. This equationimplies that themarket-to-bookratiodepends onthree factors: (i) the level of thepercentagespread ROE Ketobeearned; (ii) thevol-umeof futureinvestmentopportunitiesas expressed by therateofgrowthofearningsperyear, gand(iii)thenumberof years, n, duringwhichfutureinvestment opportunitieswill beavailablesoastoenablethegenerationof excep-tionalspreads.Thismodel contrastswithperspectivesthatstatethatapositiveROEaloneisasignal of aprotableinvestment(Varaiya et al., 1987). More recently two authors havetried to capture the determinants of rm value:Rappaport (1986) arguedthat sales growthrate, opera-ting prot margin, income tax rate, working capitalmanagement and xed capital management are thetheoretical hypotheses of valuecreationandCabyet al.(1996)testedempiricallyveindicators of valuecreationonasampleofFrenchcompanieswhichare:protability,activity, nancial policy, investment policy anddividendpolicy.844 S.B. NaceurandM. Goaied1ThisisthecaseforTunisiawherethelistedcompanies inthenancial market arenotnumerous.2Mostofthestudies examining valuecreation/destruction determinants arebased oncross-sectionnal data.This paper selects three main determinants of futurevaluecreationdepending onthe availabilityof dataandtheexploratorycharacterof this study: rmprotability,nancialpolicyanddividendpolicy.H1 Financial policyhypothesisIn a seminal paper, Modigliani and Miller (1958) show thatin a world without taxes, agency costs, or informationasymmetry repackaging the rms net operating cashows into xed cash ows for debt and residual cashows has noeect onthevalue oftherm.Morerecently,capital structure theories havefocusedonthetaxadvan-tagesofdebt (startingwithModigliani andMiller, 1963),theuseofdebt asananti-takeoverdevice, agencycostofdebt (Jensenet al., 1976; Myers, 1977), theadvantageofdebt in restrictingmanagerial discretion(Jensen,1986), theeect ofdebtoninvestorsinformationaboutthermandon their ability to oversee management (Harris et al., 1991)andthe choice of debt level as a signal of rmquality(Lelandetal.,1977; Ross,1977). Sotoexaminedebtrele-vanceandespeciallythe propositionof Ross (1977)whoprovedthatan increasein theuseofdebtwill representanunambiguoussignal tothemarketplacethat therms pro-spects haveimproved, themodel includes theratioofthesumsofallthedebtstototal assets.H2. DividendpolicyhypothesisMiller andModigliani (1961) present acogent argumentfor the fact that the value of the rmis unaected bydividendpolicy ina world without taxes or transactioncosts andwhereeveryone wasfullyinformedabout thedistributionofthermsuncertainfuturecash ows.Oncecorporateand personal incometaxes were introduced,thenthetheory(Farraret al., 1967; Brennan, 1970)suggestedthat perhaps it wouldbe optimalto pay nodividendsat allbecauseof thetaxdisadvantageof ordinaryincomeovercapital gains. This point of view was modied somewhat byMiller et al. (1978). Besides, Roze(1982) suggests thatoptimal dividendpolicymayexisteventhoughweignoretaxconsiderations.Ross (1977) suggests that implicit in the MillerModigliani dividend irrelevancy propositionis the assump-tionthatthemarketknowstherandomreturnstreamandvaluesthisstreamtosetthevalueoftherm.Armthatincreasesdividendpayoutissignalling thatis hasexpectedfuture cash ows that are suciently large to meet dividendpayments without increasing the probability of bank-ruptcy. Therefore, it may be excepted to nd empiricalevidence3that shows that the value ofa companyincreasesbecause dividends are taken as signals that the rmisexpected to have higher future cash ows (see Ross,1977;Bhattacharya,1979;Hakansson, 1982;Milleretal.,1985).Sotoexaminedividendrelevanceandinparticularits signallingimpact the ratioof total dividends tototalearningswasincludedinthemodel.H3 ProtabilityhypothesisAccordingtoRappaport (1986), protabilitycanbecon-sideredasaveryimportantvaluedriver.Animprovementof protability can originate from achieving relevanteconomies of scale, searching for cost-reducing linkageswithsuppliers andchannels, eliminating overheads thatdo not addvalue to the product andeliminating coststhat donotcontributetobuyerneeds.Sotoexamine prof-itabilityrelevance onvalue creation, one includes inthemodel theratioofthenetincometostockholdersequity.Thebasicspecicationofourmodel isasfollows:MV=BV 1 2Debt 3Pay-Out 4ROE 2where MVis themarketvalue of a rmsequity;BVis thebookvalueof arms equity; Debt istheleverageratio,whichistotal liabilitiesdividedbytotal assets; Pay-OutisthePayoutratio,whichistotal dividendsdividedbytotalearnings;ROAisthereturnonequity.III . ECONOMETRICSPECIFICATI ONSThexedeectslogitmodelThexedeectslogitmodel canbewrittenas:PrYit 1 PrYit> 1 Fi X 0it 3Wherei indexesindividuals, t indexestimeperiods,Xitis ak 1vectorofexogenousvariables,isak 1vectorofcoecients, YitisanobservedlatentvariableandFisthecumulative logistic distribution. The observed randomvariable,Yit,isdenedby:Yit 1Yit> 1 i 1 n; t 1 Ti4Where 1(.) denotesthe indicator function, so that Yit is 0; 1;Yit i X 0it itwhere the errors itare i.i.d IN0; 2.Equation(3)indicatesthatbothiandareunknownparameters for the model. Besides the number of par-ameters iincreases withN. Since Tis nite, as usuallythecasein paneldata, icannotbeconsistentlyestimated.This is known as the incidental parameter problem(Neyman and Scott, 1948). In the case of non-linear regres-sionpanel data models,theestimationsof iand are notRelationships aectingrmvalue 8453Theempirical relationship betweendividend policyandvaluearewellsummarized inCopeland andWeston(1988).independent of eachother. Thus, theconsistencyof ^ iistransmitted intothe estimator of . Tocircumvent thisproblem, chamberlain(1980)suggestmaximizingthecon-ditional likelihoodfunction:Lc YNi1Pr Yi1; Yi2; . . . YiTiXTit1Yit! 5rather than unconditional likelihood function. For the logitmodel, he showedthatPTit1 Yitis aminimumsucientstatistic for i. Hence, by conditioning onPtit1 Yit,one could sweep away the i. On the other hand, theconditional likelihood function can be maximized withrespect tousingconventional maximumlikelihoodlogitprogrammes.4Fromtheempirical pointofview, themaxi-mumlikelihoodprocedureof theconditional xed-eectslogistic model (CFELM) suers fromtwo limits. First,time-invariantvariablescannotbeestimatedwiththecon-ditional xed-eectsmodel.5Second, theestimationofbymaximizingtheconditional likelihoodfunctionmayimplya signicant loss of information, since observations aredroppedfromtheestimationprocedurewhenYitiseither0 or1forall periodsforanindividual.Althoughtheseareperfectlyvalidobservations ineverysense, theyhavenoaectintheestimationsincetheindividualscontributiontothelikelihoodiszero.Random eectsprobitmodelRandom eects probitmodel (REPM) has been consideredby Chamberlain (1980), Heckman (1981) and more recentlyby Guilkey et al., (1993), Newey (1994) and Lechner(1995). It is apotentially important econometric tool inappliedmicroeconomics using panel surveys data wherethe dependent variable is measured by a dichotomousresponse.6TheREPMmodel isofthefollowingform:Yit X 0it "iti 1 n; t 1 Ti6With"it i itHere, the individual specic eects iare treated asrandom and are independent of Xi. i IN0; 2,it IN0; 2. The errorsiand itare mutuallyindepen-dent.Thelikelihoodfunctionfor the observedsampleYitis(seeGuilkeyetal.,1993):L Yni1PYi1; . . . YitYni111Ytit1F X 0it i1 1=2" #2Yit 1( ) idi7Where 2=2 2, is the correlation between succes-sive disturbances "itfor the same individual. Consistentandasymptoticallyecientestimatorofisgivenbythemaximumlikelihoodprocedure accordingtoButtler andMotts(1982)derivations.7IV. DATAThe data set used inthe empirical work was extractedfromlistedcompanyannual reports. TheTunisianstockexchange bulletin gathered market capitalization infor-mation for a sample of 28 companies covering theperiod19901997. Thenumber of listedsecurities intheTunisianstockexchangeis30in1996 and34in1997andthereisnowayforseriousself-selectionproblems.The variables of interest incorporated inthe analysiswereasfollows:. Market/tobookratio(MBR). Its calculatedonthebasisofaformula, whichdividethemarket valueofcommon share at the end of the year by the book valueofarmequityattheyear-end.. Thedividendpolicyfactor (Pay-Out). Its calculatedastheratiooftotal dividendstototal earnings.. Thenancial policyfactor, i.e. Debt, ismeasuredastheratioofthesumofallthedebtstototal assets.. Protability is ROE. Its the ratio of the net income tostockholdersequity.. Sizeismeasuredasthelogoftotal assets.Summarystatisticsforthevariables usedintheanalysisare reportedin theappendix (see AppendixTable A1). Thematrixofthecorrelationbetweenthevariables usedintheanalysisispresentedinTable1.Itcanbeseenthatexcept846 S.B. NaceurandM. Goaied4Formoredetailsabouttheconditional likelihood procedureforthexedeectslogitmodel,seeChamberlain(1980),Hsiao(1986),Hosmer andLemeshow(1989), Hamerle andRonning (1995).5Anysuchvariables arecollinear withthexedeects mi,andjustasthe midropout oftheconditional likelihood, sodoallalltime-invariant variables.6Empiricalstudies oftheREPMcanbefound inPfeiferetal.(1992) andLechner,(1995).7The authorsreportedthat amajor computationalprobleminthe estimationprocess is the evaluationof the integral in(3). Tocircumvent this problem, theysuggest theuse ofHermite integration (seeStround, 1974 formore details).for size, all the variables of interest are positively correlatedwithMBR, withacorrelationexceeding40%for prot-ability(40.9%). Itisnotedalsoa highcorrelationbetweendebt andsize (82.8%), whichmay induce a problemofmulticolinearity.5. RESULTSANDCONCLUSIONThe futurevalue creation in the Tunisian stockexchange isregressedonfactors accountingfordividendpolicy(Pay-out), nancial policy (Debt),and protability (ROE) of thelistedcompanies. Sincethestudyisdealingwithapooledsample of individual companies data, the issue of rmheterogeneityisanimportantissue. Themaincharacteris-ticsof the unit, which serve as heterogeneitycontrolsin themodel are:thesizeofthecompany(Size),theindustrythecompanybelongs toandthe nature of property (Privateversuspublic).Thespecicationisasfollows:8Yit 1 2 Pay-Outit1 3Debtit1 4ROEit1 5SIZEit1 6TREND 1DINDi 2DINSi 3DFINi 4DPRVi i iti 1; . . . ; n;t 2; . . . ; T 8Oneof thefeatures of thisstudyis theability to investigatesectoral dierencesinvaluecreationprocess. Thisisdoneby specifying a set oftime-invariant dummyvariables, thatare:DINDi 1if firmi belongstoindustrial sector, 0elsewhere;DINSi 1if firmi belongstoinsurancesector, 0elsewhere;DFINi 1if firmi belongtootherfinancial institutions,0elsewhere;DPRVi 1if firmi isprivate, 0elsewhere:Thereferencegroupforthis set of dummyvariablesisthe group of public banks. A time trend variable (TREND)is included as an additional explanatory variable to capturetemporaleects(forexample, the impact of the reform)onthevaluecreationprocess.Table A2 in the Appendix presents the MLEof theCFELM. Sincemanycompanieshaveeither future valuecreationequal 1or0forallperiods (19companiesofthetotal 28), theseobservationsaredroppedfromtheestima-tionprocedure. Hence, the reportednumber of observa-tions, 43, is the eective sample size of the estimation(38.7%of thetotal 111). Theconsequence, is the loss ineciency in estimating the impact of time-variantvariables.9For this reason, we prefer the use of theREPMspecication.Table 2 presents the MLEresults of the REPMandstandard probit specication. The former seems to givesome signicant coecient estimates that are consistentwiththetheoretical expectations. Especially,theprobabil-ityofcreatingfuturevaluesispositivelyandsignicantlycorrelatedwith protability(ROE).Basically a very prot-ablecompany conveys signals of the qualityof manage-mentandtherefore, resultinavaluecreation.The debt eect is positive and the dividend eect is nega-tivebut bothareinsignicant intheREPM. Oneshouldemphasize that the capital structure anddividendirrele-vancetheoryofModiglianiandMillerwouldbeacceptedfortheTunisianlistedcompanies. TheresultsalsosuggestRelationships aectingrmvalue 847Table1. Correlationbetweenvariables inthemodelMBR Pay-Out ROE Size DebtMBR 1.000Pay-Out 0.001 1.000ROE 0.409 70.172 1.000Size 70.054 70.222 70.006 1.000Debt 0.011 70.427 0.098 0.828 1.0008Followingthesuggestionofananonymous referee, weusedlaggedvaluesinsteadof contemporaneous valuesforsomeregressors(ROE, Pay-Out, Debt and Size) because there is some room for delayed eects (accounting data are published and included in the shareprice several months afterthe endoftheyear).9STATA5.0 econometric software wasused. The considerable loss of information resulting from the use of the CLFEMprevent ustoobtain signicantresultswhenperforming MLEprocedure.Table2. MLEresultsforrandomeectspanel probitmodel andstandard probitStandard probit Random eectpanelprobitCoecient t-stat Coecient t-statIntercept 7997.7 73.7 71017.7 73.76ROE 13.3 2.6 10.97 2.13POUT 70.42 70.45 70.572 70.58Size 71.53 72.4 71.55 72.26Debt 1.25 0.8 1.16 0.69TREND 0.506 3.7 0.51 3.8DFIN 73.57 73.54 73.72 73.5DINS 71.19 71.33 71.38 71.5DIND 71.57 71.32 71.71 71.8DPRV 1.09 2.04 1.14 1.99Pseudo-R20.42LogL 738.5 733.9Specication test 29 51:14 29 24:3Sample 111 111that theprobabilityof creatingvaluesispositivelycorre-latedwiththenatureof propertymeaningthat privately-owned companies are morevalue creative thatstate-ownedrms. Besides, thisresult isaclear-cutargumenttoaccel-erate the slowlyprivatizationprogramme of the Tunisiastate-ownedbanks. Also, it wasfoundthat bigrms areless prone tocreate value thansmall rms are (the sizeeect is negativeandsignicant inthe REPM), this canbejustiedbythe fact that state-ownedrms arebiggerthanprivately-ownedcompanies.Finally,itappearsthattheprobabilityofcreatingvalueishigherinthebanksectorthaninothersectors, provingthat the Tunisian banks are the best managed and the moreecientlistedcompaniesintheTunisianStockExchange.Andlast butnot least,thetimetrendfactoris positiveandhighly signicant for bothmodels. This nding suggeststhat the progressive reforms of the Tunisian stock exchangehave attracted newinvestors, who have contributed bytheir purchase tothe appreciationof the value of listedshares.ACKNOWLEDGEMENTSTheauthors are especiallygrateful toRaouf Boudabous(Director inthe Tunis Stock Exchange), to the staofthe TunisianBankingAssociation, toNabil Msabiaafortheir involvement with the initial stages of this research andtoananonymousreferee.REFERENCESAlberts, W. et al. 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(1984)Evaluationnancie reet strate gique: versunnouveau cadre conceptuel de le valuation Analyse Financiere,3,7885.Varaiya, N. et al., (1987) The relationship between growth, prot-ability and rm value, Strategic Management Journal, 8, 48797.Relationships aectingrmvalue 849APPENDIXTableA1. Descriptive statistics forthe variables inthe modelMean Stddev Minimum MaximumMBR 0.766 0.425 0 1Pay-Out 0.446 0.225 0 1.354ROE 0.119 0.045 0.002 0.246Size 8.360 0.780 6.437 9.484Debt 0.773 0.246 0.002 0.982TableA2. MLEoftheconditional xedeectslogitmodelConditional xedeectslogitmodelCoecient t-statIntercept ROE 710.59 70.4POUT 1.4 0.14Size 45.8 1.3Debt 715.1 70.51TREND 70.09 70.2DFIN DINS DIND DPRV LogL 76.28Sample 43